Friday 6 December 2019

Car buyer? Learn your ABC of PCPs

Car registrations for 2016 are motoring - but look out for the pitfalls, says our motoring correspondent

Forecourt: More than one-in-four new cars are being financed with personal-contract plans.
Forecourt: More than one-in-four new cars are being financed with personal-contract plans.
Eddie Cunningham

Eddie Cunningham

On the face of it, the latest phenomenon to sweep dealers' forecourts is as close to being all things to all people as a car finance deal can possibly be.

Personal Contract Plans (PCPs) are most certainly fuelling some extraordinary numbers of new-car deals - to the extent that registrations last month topped January 2015 by a substantial 10,000.

Motorists who otherwise could not afford a new car are now driving away in one for a relatively modest outlay - a 10pc to 30pc deposit.

More than one-in-four (28pc) new cars are being financed that way, according to a recent survey of SIMI dealerships.

That is just an average: a lot of brands are relative newcomers to the concept while others have been forging ahead for some time. Everyone expects an exponential increase this year and next - and for the foreseeable future.

Of course PCPs are being aided and abetted by the upturn in economic fortunes and by people having to consider a new car after years on the hard shoulder.

But everyone agrees that without the PCP deal we wouldn't have the near-vertical sales take-off of last year, and particularly this (albeit from really low levels back the years).

For all that, I believe their arrival should be accompanied by the occasional flashing hazard light. But before getting to that, let me outline what a PCP is in basic terms. There is a lot of confusion - even among some in the motoring business.

Effectively a PCP is a hire-purchase agreement built on three simple planks:

1 You have a deposit or a trade-in. The experts tell me 22pc of the new car's price is the ideal amount to put down.

2 You agree the length of the deal (usually three years), the repayments each month and, vitally, the guaranteed minimum the car will be worth at the end of the deal. You also agree how many kilometres you will drive each year (more anon).

3 At the end of the term you can a) buy the car for the pre-agreed price, b) hand back the keys and walk away, or c) use the equity in the car as a deposit for a new model.

Couldn't be simpler could it? In fairness it couldn't. But there are a few potential little devils in the detail that prospective buyers would do well to watch out for.

First off, you don't own the car unless and until you stump up cash at the end of three years.

Furthermore, the chances of ever owning a car again diminish every time you sign up for another deal. 'Usership' before 'ownership' is very much part of our evolving psyche (phones, rented accommodation). But lots of people still like to own. PCPs are not for them.

Secondly you will be penalised if you exceed your agreed mileage. It is so much for each kilometre and the bill can add up quickly. It's no fun having a car and anxiously watching the odometer.

So if you are covering 30,000km a year, it's not the best plan unless you can manage an especially good deal. Don't forget that even on lower mileage the annual figure is factored in to your repayments.

Thirdly, and most importantly, if the deal you do at the outset is not properly structured, you could end up having to find a lot more money than you expected to make the deposit on your subsequent car.

This is the critical area. PCPs work really well when the repayments take account of how much you will need to go again. Beware the attraction of a low monthly outlay and the nightmare of a big balloon payment at the end.

The size of your repayments is a fine balancing act that takes so many factors into account. In an ideal scenario you go from one new car to the other on much the same outlay and never have to put your hand in your pocket.

It is vital to read the small print, take your time assessing the offer and be absolutely sure you can afford the repayments.

This may all sound a bit negative from me but I would rather describe it as cautionary. You need to be absolutely certain of all the bits and pieces of your PCP.

So what lies ahead? Will there be forecourts full of used cars that nobody wants because everyone is signing up for a PCP on a new one?

I don't think so. Not everyone wants a new car. Depreciation can be high for the first three years and people like to let others bear the brunt of that. There will be far more second-hand cars from which to choose, that's for sure.

That's a good thing because we've been strapped for fresh motors for years now - people were not buying so they were not trading in. Prices have been high despite imports from the UK (now steadily declining). As well as that, used PCP cars should be better minded as every deal is based on normal wear, tear and good maintenance.

Maybe, down the road there will be a PCP deal for three-year-old cars? There have already been selective deals for 18-month-old models so you'd never know.

If it happens then PCPs would surely be kings of the road.

Eddie Cunningham is Motoring Correspondent.

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